Ask Tara: Navigating Condo/FHA Roadblocks

Q: I'm buying a bank-owned condo and have signed to release all contingencies. But the FHA wants so many things signed by the HOA management company that it's taking forever! We were supposed to have closed about six weeks ago, but the FHA keeps coming back and saying it needs something else.

The bank that I'm buying the property from is charging me $100 per day because we didn't close on time. How can I back out of this mess? What can I do to get my $6,000 deposit back? --M. Johnson

A: Welcome to the not-always-so-wonderful world of buying a condo in a non-Housing and Urban Development (HUD)-approved complex using an FHA loan. Many people are not aware, but to buy a condominium with an FHA loan, not only must your particular unit pass FHA's condition guidelines, but the actual complex must be approved by HUD.

There is a website operated by the federal Department of Housing and Urban Development, which administers the FHA loan program, with a searchable database for all FHA-approved condo complexes in the country.

But what about complexes that are not HUD-approved?

Until Feb. 1 of this year, there was a fairly simple process for obtaining an FHA "spot approval" of a complex -- it was a simple form that required some information from the homeowners association's management company and also required that the escrow holder document that fewer than 10 percent of the units in the complex were attached to FHA loans.

It was somewhat of a nuisance to get through, because in a larger complex, it was very work-intensive for escrow to pull all the trust deeds so they could verify the "less than 10 percent" FHA loan requirement, but it was generally not a deal-killer.

However, in an ostensible effort to "streamline" the spot approval process, HUD and FHA did away with spot approvals entirely this year. Instead, every time a buyer wants to finance a condo purchase in a non-HUD-approved complex, they must initiate the full process of having that complex become HUD-approved.

The upside? Every complex will have to go through this only once. The downside? HOA management companies across the nation were unprepared for this change, and are moving extremely slowly -- if at all -- to provide the documentation and signatures HUD requires to effect this approval and close these transactions.

As such, home purchase transactions across the country are being canceled or, like yours, severely impaired by the molasses-like pace of these approval applications and HOA managers' responses to HUD requests.

But here's the rub. You've already removed all your contingencies. I don't know what state you're in, but almost everywhere, removing your contingencies also renders your earnest money deposit nonrefundable if you cancel the transaction. First things first -- decide if you still want to buy the place. If you don't, and are willing to forfeit your $6,000, that is an option available to you.

However, if you do still really want the home, push your mortgage broker (your team member closest to the HUD approval process) to call in all the favors she can to get the HOA management company's deliverables in. He or she will have much better luck exerting pressure there than on the HUD side of the equation.

Once that process is done, express to your real estate broker that you simply do not have the extra cash to pay a $100 per diem late fee on top of your downpayment and closing costs, as the bank is requesting. This late-fee provision is very common in REO purchase contracts, but I've also seen this waived by the bank/seller many times when they are made aware that the buyer (a) is not at fault for the delay, and (b) does not have the wherewithal to close the transaction if the late fee is imposed, but can close if the late fee is waived.

In fact, I've been involved in numerous transactions where the bank simply did not ask for the late fee, although it was in the contract, and they were entitled to it. Rather, banks generally wield the late-fee provision as leverage to get a buyer to perform; as a result, you are unlikely to get the bank to waive the late fee until you are in a position to close.

You are not legally entitled to your deposit money back. You can certainly ask, but it is very unlikely to happen. Accordingly, if you can get the management company's signatures and materials in, it behooves you to do what you can to get the late fee waived and close the transaction. This is much more likely to happen than a refund of your deposit money.

However, you are not really in a position to request a late-fee waiver until your side is ready to perform by closing the transaction. So, to put first things first, have your mortgage broker or lender lean hard on the management company to respond quickly to the HUD requests.